Zombie lending due to the fear of fire sales

Kaushalendra Kishore, Nirupama Kulkarni and Saurabh Roy

Journal of Corporate Finance, 2025, vol. 91, issue C

Abstract: This paper provides evidence of a new cost of fire sales: zombie lending by banks. Banks with high market share are more likely to internalize the negative spillovers of falling collateral prices during a fire sale. To prevent prices from falling further during a fire sale, these banks do not liquidate defaulted firms and instead give zombie loans to keep them alive. Using structural breaks in real estate prices to identify periods of fire sales in different MSAs, we provide evidence that banks with high market share give zombie loans to firms with relatively higher real estate assets during a fire sale. Further, congestion due to zombie firms in an industry reduces the investment and profitability of healthier firms. Overall, we highlight a new mechanism for zombie lending resulting from reduced collateral liquidation in markets prone to fire sales.

Keywords: Fire sales; Zombie lending; Collateral; Real estate; Crises (search for similar items in EconPapers)
JEL-codes: G21 G33 L25 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:91:y:2025:i:c:s0929119924001937

DOI: 10.1016/j.jcorpfin.2024.102731

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